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A staple of mid-1980’s funding modeling, q-theory was an alternative choice to the Keynes’ marginal effectivity of capital or Jorgenson person price of capital approaches. A model of q –the ratio of market worth to alternative worth of an organization’s capital — was central in Summers’ 1981 BPEA paper modeling company funding conduct. And but, q-theory is now nearly fully absent from latest dialogue of the extent of capital funding (in distinction to the controversy practically twenty years in the past). Why? First an image of q, the market value relative to alternative price of bodily capital.
Determine 1: Tobin’s q (blue), and detrended Tobin’s q (tan) for the nonfinancial company sector. Detrended q calculated by regressing Tobin’s q on inventory of mental property merchandise, linearly interpolated from annual knowledge. NBER outlined peak-to-trough recession dates shaded grey. Supply: Fed Move of Funds by way of FRED, BEA, NBER, and creator’s calculations.
Tobin’s q is closing in on 2 in 2025Q2, whereas it solely reached about 1.5 on the peak of the dot.com growth.
Chirinko (JEL, 1993) opinions the varied fashions of funding, and of q, notes that common q (which might in principal be calculated) equals marginal q (which is unobservable) if (1) markets are completely aggressive, (2) manufacturing and adjustment price applied sciences are linearly homogeneous, (3) capital is completely homogeneous, and (4) funding selections are largely separate from different actual and monetary selections.
Evidently, in an period of AI and a few capital is intangible, common q is prone to be mismeasured, and much more unlikely to be consultant of marginal q. Assuming the diploma of mismeasurement of common q is because of intangibles which might be proxied by mental property merchandise (IPP), R&D and software program (BEA [1] [2]), then one obtains the measure proven because the brown line in Determine 1. (It ought to be famous that the speed at which intangibles depreciate is unclear, relying on innovation and excludability (Crouzet et al., 2022), so the web impression on the intangibles capital inventory is unclear; additionally IPP doesn’t embody “organizational capital” and many others.)
In 2025Q2, detrended q is then decrease than it was in 2000Q1 (1.35 vs. 1.54). I’d wish to say this implies the market’s valuation of the capital inventory shouldn’t be excessively excessive, however actually detrending utilizing log inventory of IPP is fairly near linear (deterministic) detrending, and it is a harmful factor to do when q appears to be like like an I(1) course of (one can’t reject the null speculation of unit root).
Determine 2: Tobin’s q (blue, left scale), and log inventory of mental property merchandise (tan, log proper scale) for the nonfinancial company sector, linearly interpolated from annual knowledge. NBER outlined peak-to-trough recession dates shaded grey. Supply: Fed Move of Funds by way of FRED, BEA, NBER, and creator’s calculations.
So, we’re pressured to look elsewhere for insights into what the extent of funding ought to be (ahead P/E’s or CAPE possibly).
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